Turn, turn, turn? Forever?
An Economic Analysis of the NBA, Part II
An Economic Analysis of the NBA, Part I: The NBA is a Cartel
In our previous post in this economic analysis of the NBA, we looked at the basic framework for understanding the NBA as an economic firm and how the teams’ owners operate as a cartel.
We now turn our gaze to another segment of the NBA: the players. To a large extent these days, and really since the ascendance of Michael Jordan, the argument has been made that players are surpassing teams as the basic recognizable units of the NBA. As a result, a careful look at the problem of labor in the NBA is called for.
Labor is generally considered to the work done by humans. This is a necessary component of production, even in a factory that is largely automated. As with the study of the NBA and its constituent firms, what constitutes labor depends on the scope of the problem, but here we will consider only the basketball players. We will not be considering the coaches, managers, sales representatives, and so on.
There are several fundamental differences between owners and players. Recently the former group has been deemed the billionaires, while the latter is termed the millionaires. Neither of these labels is true in all cases.
To me, the most important difference is the longevity they have in their role. An owner can own from any age to any larger age, with increasing age, up to a point, likely making them a better owner. While some teams are sold in a matter of years, it is common for owners to be so for decades.
With players, the overall pattern is the same, but the time-scale is very compressed. Also, as the players need to be physically fit enough to compete with a constant flood of 20-year-olds, while owners just need enough physical health to manage their financial empires.
This difference in perspective, in capacity, is key to understanding not only labor, but also labor relations, in the NBA.
We begin by looking at the system for players entering and exiting the NBA to understand the forces operating on NBA careers. Next, we examine the how the NBA players acting as a union further affects both their careers and relationship with owners. Then, we consider more subtle aspects of the labor situation, such as great differences between talent levels of players and how these relate to the concerns of owners. Lastly, we consider a possible evolution of the players’ power.
When one thinks of an NBA player, we often think of a player that is exceptional rather than typical. We consider Michael Jordan, Kareem Abdul-Jabbar, or Larry Bird instead of Rusty LaRue, Billy Thompson, or Rick Carlisle. To avoid this sort of bias, rather than beginning by studying the careers of actual players, we try to define the typical player career by examining the forces governing careers.
There is a maximum of 450 players signed to the 30 NBA teamsâ€™ active rosters. A population of players on the fringe of playing, players called up when a player gets injured, for instance, that can be considered NBA players in some cases. This is the smallest roster of the four major U.S. sports leagues. The roster size is driven mostly by the requirement that exactly 5 players from each team are on the court at one time, the length of the season, the length of each game, and distribution of talent in the player population.
In the extreme, if a season were just a few games, a team could get by with minimal substitutes, asking the players to play the entirety of each 48 minute game, taking a chance that injury would not decimate their chances at victory. In turn, this would not be possible if the games were twice as long. It is a delicate balance that has been struck.
Each year around 60 players are awarded contracts via the NBA draft. These 60 players being pushed into the NBA necessarily displace some players who have been playing for some time. In addition, there are undrafted free agents and the fringe players mentioned above that are added to teams. These players are pulled into service due to injury to an active player or a lack of production.
Additionally, there is a basal level of unemployment in the NBA. The 15 players per team cited above is a maximum that is not taken advantage of in practice. The minimum roster is in effect 13 players, so we are justified in using an average of 14 players per team. This would lead to 30 jobs per season that are unfilled due to the decision of the employer.
To account for player obsolescence and injury, we turn to some simple empiricism. Fans sit around waiting for a season-ending injury to happen but are shocked when multiple major injuries occur each year for consecutive years. Therefore we can expect about 1 player whose production needs replacing by someone not on a roster on opening day.
As a result of these forces, there is a turnover of about 21% ((60+30)/(14*30) = 0.214) each year in the NBA, yielding an average playing career of about 4.7 seasons. This is average. This is not â€œtypicalâ€ or the â€œmost common.â€ Rather, as a very large percentage of players in the NBA have no NBA experience on opening day, the most typical numbers smaller than the average. Also, as it is necessary to progress through the years-in-the-NBA in order, with each player adding 1 year of experience per year, which would in most circumstances goes without saying, but Iâ€™ve actually had this conversation before . . . yes, really . . . we expect the number of players in each group of years-of-experience to decrease, with a couple small deviations expected.
Data bears out most these conclusions. The anomalies are the slight peaks in the population of players at 3, 5 and 7 years being slightly higher than one might expect (by 2 or 3 players), and the relatively static population of players with 1 and 2 years of experience, when one would expect a decrease. These are almost certainly an effect of guaranteed contracts. The former is almost purely so, and the latter would be that veteran players who are pulled into the league from the outside are preferentially players who were drafted in the second round, left the NBA to work on their game in another league, then returned when the opportunity arrived. This is the source for the higher than expected players with 2 years of experience on NBA rosters: their service is discontinuous. This can be drilled down into further, Iâ€™m sure, but the major cause and effect relationships are clear, and, as such, we take this simple analysis as a good one and move on.
This analysis and complementary data may come as a shock to many, even moreso as we consider their consequences. More than half the players in the NBA fail to make it to their sixth year, more than a quarter of the players are out after two years, and about 1 in 6 players are out after a single season.
If we project an average NBA salary for these players, they earn in the middle $5m’s (under the recent CBA) per year, but this is inappropriate. The earlier a player exits the NBA, the higher the likelihood that players earned a salary far below this level.
This positive correlation between salary and tenure exists in most professions: The longer the work, the more you make per unit of work, whether that be time, unit, or just a flat fee, generally. In fact, this is mandated in a CBA in many ways typically. Both minimum salaries and maximum salaries are a function of tenure, for instance.
The average household income in the US in 2004 was $60,528 compared to a median salary of $43,318. This is a ratio of about 1.4, indicating a heavy upper-tail. In other words, the money the few rich make is `richer’ than the lack of money the many poor have is `poor’. This sort of behavior is typical in the real economic systems where there is not enough variation to drive a normal distribution (think Central Limit Theorem for the math/stat inclined readers) into being.
Draft pick salaries are mandated and dependent on draft position and year of draft for the most part; at least they were in the most recent CBA, and that general fact should not change. Assuming that draftees receive the max possible, 120% of scale, first rounders will be paid $2.2m on average. The actual salaries range from around $1m to about $5.3m for 2011 picks. For reference, pick 11 receives approximately the average salary. So, 1/3 of the first rounders are above average in salary, and 2/3 of them are below. Again, no bell curve.
Second rounders fare worse, of course, and at least half of the NBA players to ever play are not first rounders.
Assuming the 5 year career noted above, tracking pick number 11, assuming max raises, the max qualifying offer, etc., he ends up with $15m and the end of his career. This is a gross amount, reduced by taxes (just like everyone else’s) and agent fees, for instance. This is a healthy haul and many times a typical American’s lifetime earnings.
Tracking pick number 30 over the same career instead, leads to a total of about $9m, about 60% of the number 11 pick.
The majority of this money is made in the last 2 years of the deal, as the raise for the 4th year and for the qualifying offer is substantial: about 33% then 37% for pick 11; 80% then 50% for pick 30. If these options are not picked up, or if they are not available, such as for second round picks, the aggregate salaries can be much less. They drop even more if they are the many players whose careers are much shorter than the 5 years used in these calculations.
A typical American’s lifetime earning potential varies strongly with education, ranging from $1.2m with only completing secondary school and $4.4m for those obtaining a professional degree. Again, results may vary, but the point is that NBA players, unless they manage their money much more carefully than athletes often do, are not a world away from people we contact in our daily lives.
The big difference is, of course, the age at which their career is over, economically speaking. An NBA player has many years to engage in a second career if willing and able. There is also a certain prestige coming with being a professional athlete that can be parleyed into a career, but this is hard to quantify, and certainly won’t help anyone keep a job that it helps them get. If that athlete continues to work after amassing a million dollars or more, they can live their days comfortably, but such players are far from living in the lap of luxury.
It should be noted that a large driver in this earning potential is the draft, particularly the number of rounds. Close examination of this analysis will show that adding a third round to the draft, as has been recently proposed in a casual fashion, would drive the average career down to 3.5 years, lopping off a year of earnings on average, and limiting many players to just 2 years and under $2m in gross earnings at a rate far exceeding that seen today.
The Players’ Union
In our previous post in this economic analysis of the NBA, we looked at the basic framework for understanding the NBA as an economic firm how it operates as a cartel. The fact that it is a cartel, as opposed to group of similar business that are competing, led to some interesting conclusions. We saw that competition is limited and that they limit the supply of their product, leading to, among other things, higher prices for consumers.
As powerful as cartels are, we also saw that they are unstable entities. The members tend to diverge without strong central leadership or some other guiding principle. As we dial up the leadership and guiding principle included, the cartel becomes stronger and more unified. The natural limit of this trajectory is a monopoly. A monopoly is an economic firm that is the sole provider of a good or service to a market.
A monopoly is, in a sense, the most powerful economic construct. As a sole provider, the monopoly is immune from the effects of competition. This gives the monopoly a resistance to change or criticism from the consumer. A monopoly does not have to innovate, as monopolies can take advantage of economies of scale to deter any challengers from entering the market.
The owners, however, are not a monopoly, at least from the perspective of the players (they may be correctly considered so to many fans of US professional basketball). Nevertheless, the owners, as a cartel, do have tremendous power over the players as individuals. In fact, their position as a sole buyer is termed monopsony. By wielding their monopsonistic power, they can drive players’ wages down.
As we all know, basketball players are paid to play all over the world. The NBA, however, is far and away the most lucrative organization for players in terms of average salary, work environment, and prestige. This makes them, in effect, a sole purchaser.
In response to this, the players did what every many other groups of workers did when their industry grew beyond its initial conception: They formed their own monopoly. Fight fire with fire.
Monopolies that `sell’ labor are typically called Unions, or Labor Unions. The union of NBA players is called the National Basketball Players Association (NBPA).
Mountains of case law and bureaucracy exist to deal with labor, unionized or not, resulting in a very complex relationship between two, seemingly singular, entities: a cartel of owners and a union of players.
So, in the context of labor, we have exactly one purchaser and exactly one seller, where the purchaser is a cartel and the seller is a union. One might think that this means the economic analysis of this situation is trivial.
This situation leads to very different economics than the free market most people think of when they think of economics. As complex as it is, the free market approximation is about a simple as it gets. In the free market, there is always another seller and always another buyer, for instance. In this case, both of those are false.
A free-market-ish analysis of this situation would lead the buyers to drive the price down to near zero, as there is no competition to set the market. Similarly, the seller can charge anything they want. Clearly, neither of these things is true.
Leaving the NBA for a moment, we turn to other industries to get some perspective on this and how it should be analyzed.
As the industrial revolution took hold, larger and larger companies were formed to take advantage of economies of scale and to make the huge capital investments needed for the ever newer methods of production. In America particularly, this was coupled with an expansion of the nation into contiguous land, something that European countries had a tougher time doing. The railroads were a natural outgrowth of this, but a not-so-natural associated development was the birth of the modern corporation.
Orginally a convenience of sorts, corporations have developed many powers they did not originally have. These powers, combined with the previously nearly-unheard-of wealth and a true conquering spirit, led to the development of, among other things, `company towns’. Company towns were just that: towns completely, or nearly so, owned by a single company, often the major employer in the area. Thus, a worker got paid by the company they worked for then turned around and gave those ducats right back to the company. In this case, the entire economy is based on two entities: the company and the labor.
As you may have noticed, such towns, at least to this degree, do not exist anymore. They were bad, bad ideas. When the economy was fine, all was well. When things turned south, however, the company would cut costs by lowering wages, but did not trim its income from company towns to compensate, for instance, by lowering rent. That cycle of money stopped very rapidly as a result, leading to strikes/evictions and things more convoluted and horrible. A big reason for this is that workers had no other income sources to which they could turn to make up the lost wages since the company lowered all wages in the area.
On the other side of the equation, these large companies that were a monopsony to their workers, they would be a monopoly to customers. U.S. Steel was such a company. Once they cornered the market on steel, they could have raised prices to guarantee profits in any environment, unless people turned to an inferior good. Rather, the strategy to lower costs in an effort to foster new markets was adopted.
Despite the occasion monopoly/monopsony success story, there is strict control over these entities today, in part because of their ability to exploit labor. This ability is actually what led to the rise of unions. Monopolies also have the ability to exploit consumers, which is another huge source of justification for regulation of monopolies. As an aside, not all monopolies are bad, and some are actually allowed and encouraged by the government, if regulated, as a means to protect both consumer and labor interests.
Consider the following game a labor monopsonist could use to drive wages down to an arbitrarily low number. A company representative would ask an employee to give up a small part of his salary, as there is a person who is willing to do that employee’s job for their net pay or less. If true, and it would likely be so, the employee would likely take the cut in pay. Using the lone potential low wage employee, an employer can actually lower the money paid on all comparable labor by repeating this process over and over with various workers. This technique yields short term gain without doubt, but destabilizes industries and has tremendously negative long-term effects.
This same game can be used to extract other advantages, fueling the same destabilization.
As a result of this, unions are necessary. They not only protect workers, but they allow the formation of companies that are labor monopsonists, since collective bargaining prevents the direct divide-and-conquer techniques. Indirect techniques are still possible, such as making wage offers below market value if it is believed that the union would accept them based on short-term needs. Even in this case, collective bargaining mitigates the downward force of these tactics.
The results of collective bargaining are stored in a collective bargaining agreement, or CBA. These agreements detail the financial relationship between the union and the employer, working conditions, employment constraints, and a host of other matters.
Beyond the legal and economics benefits conferred to union members, a union provides several less tangible benefits, as well. A union, in theory, will persist in perpetuity. This gives members a larger sense of purpose, like that they can affect the lives of future members with their action. It also fosters a sense of community, both formally through meetings and collective bargaining, and informally through membership and camaraderie.
This larger sense of purpose should not be dismissed. Much effort has been spent in the name of future generations in all walks of life. People can be a little more selfless when considering how their decisions will affect future generations. As the natural draft cycle eventually turns over every NBA player, the union will continue to exist as it did for current players, though it would have no direct continuity to the union of today in terms of membership.
This membership works in the other direction, as well. The National Basketball Retired Players Association is a relatively new construction. Founded by former players, it interfaces with the NBA, NBPA, the Harlem Globetrotters, current and recent players, and communities. Besides various charitable activities, the NBRPA works with players to transition them into their post-NBA lives and advocates for post-retirement benefits. The current head of the NBRPA is Arnie Fielkow, former New Orleans City Councilman.
The NBPA, for some at least, is more than a legal construct. It is precious institution that they are a part of for a time, and it should be left as they found it, if not better.
There are negative parts of NBPA membership, of course. Most obviously, since labor deals are bargained collectively, a member may disagree with a deal that is imposed up on him. Also, there are dues and various service aspects to union membership of any kind.
This is just the tip of the iceberg, but it should be clear that unions derive the powers from two main sources: collective bargaining, which is a type of monopoly power, and the fact that without existence of a labor union, a business could be exposed to a host of legal threats including treble (triple) damages and a break-up order. This second power, now called `decertification’, was used in the NFL’s recent CBA negotiations, and is more subtle and complicated than the monopoly-based power. It is more rooted in the symbiosis between the monopolist and monopsonist that is evident the situation is seen correctly.
It should be clear that unions are, in general, quite powerful. The NBPA is particularly powerful. They are distinguished by being particularly small. This may seem counter-intuitive, but the game of basketball requires fewer players than other major American sports and draws most of its talent from the domestic pool, though the worldwide pipeline is growing. The fact that this union contains all the best players in the world combined with the NBA’s reliance on marketing players and the enormous effect those best players can have on franchises both on and off the court is the source of their power. Until the NBA’s marketing changes and more star players spring up, the NBPA will remain quite powerful.
As with many things, the source of strength, the concentration of the top talent, also leads to some of its weakness. As noted above, the great disparity in pay among draft picks leads to young players with very different fiscal outlooks. These differences persist as the players’ careers advance.
This pay disparity is often tied to the talent disparity in the NBA, which is enormous. Of late, however, the income of players has been shifting to the middle class of the NBA, making them more well-paid and more powerful.
Guaranteed contracts are the norm in the NBA, though some deals are non-guaranteed, even outside the various options available in the recent CBA. These contracts give the players certainty of pay and give the owners surety that no other owner will use that player’s talent against them. It also gives them the likelihood of being able the use that talent against other teams, but that is not guaranteed, as the player may be injured, decline in performance, or may have been mistakenly evaluated as a better fit than they are.
In this fashion, guaranteed contracts become more problematic for ownership as their value and duration increases. Thus, a maximum player salary has been instituted. This rule directly affects few NBA players in terms of lowering their salary greatly compared to their relative value to that of other players, but indirectly affects many other players by raising their salaries slightly. Since rookies, are on deals of a pre-determined structure, the players that remain in the NBA longer than average are the beneficiaries of the savings from the max deals and rookie deals, not to mention any other spending.
The rise of the middle class in the NBA in terms of power stems from both the flexibility of the contracts from the perspective of the owners and from their improving financial position from the perspective from the players. In the latter case, they have the experience and are directly affected by changes in spending.
Not only has this led to the recent NBA lockout in terms of increasing spending, it has led to a different sort of disturbance.
In recent years, the number of top players demanding . . . and demanding and receiving . . . trades away from teams, or to very particular teams, has increased. Free agent players have begun working together form teams of their construction. This is enabled by exceptions to the salary cap, max deals, and a disparity of spending power among the team owners.
Max deals, originally meant to protect owners from both themselves in terms of over-committing to players, such as the first Kevin Garnett extension in Minnesota, and from the risk associated with athletes, such as injury, have actually given the top players, and only the top players, the means to wield this power over them. Since the top players are necessarily underpaid by a wide margin, they can team up to try to win championships. This leads to competitive imbalance that helps a few owners but hurts most of them.
Also, the fact that superstar players are already vastly underpaid in some cases, it’s easier for them to give up just a little more to achieve even loftier goals, such as forming a team of superstars. Leaving an extra million dollars on the table to help secure your place in NBA history may be worth it when you are already leaving ten million dollars there no matter what, especially when that first ten million does little to increase ones chances at a title, history, or any other `extra’ thing that max deal players use to make their decisions.
Thus, under the current system, players are beginning to control more and more aspects of the NBA and more and more of their own fate. This stands to reason, as the max deal limits direct payments to players. These players often have outside income tied to marketing, such as shoes or other apparel. When underpaid, however, workers look to equalize the disparity in other ways, just as owners look for other ways to attract max deal players since they can’t do with financial tools in all cases.
This power has become a means of compensation, whether it was offered or not. The owners who benefit from these efforts likely have no issue with the freedom and drive of their players, but the other owners have, and should, take exception.
In a more general context, this constitutes a revolution.
Make no mistake about it . . . this is a revolution.
Basketball has grown from a mere game, to a pass-time, to an organized sport, to a business. During this time, players went from being a few people looking to have a good time to anyone looking to have a good time. From this group, players emerged who honed their skills. Once enough players with enough skill emerged, entrepreneurs organized these players into a money-making enterprise. As the business matured, the players went from playing as a side-job to playing for a full-time.
Over time, however, the business becomes more than entrepreneurial venture. Once the business of basketball becomes a business where basketball is a means to another end, it becomes a capitalist venture, to use the framework of Karl Marx.
This transition has happened.
The NBA’s income from tickets, income from people coming to see basketball, doesn’t even cover payroll these days. Basketball, and the players, are used to sell ads, and, therefore, all manner of products, apparel, video games, food, and other things. Beyond that, players use their NBA status to get into commercials, movies, and other industries.
As noted in the previous post, the NBA produces entertainment by using the transfer of its manufactured wins as a setting, at least in part. This business model means that there are adjacent markets that are very lucrative, such those mentioned above. This makes the capitalization both natural and quite smooth.
In fact, this entire path fits fairly cleanly into Marx’s concept of the natural evolution of labor and production.
Marx was what is known as a materialist. Thus, he sees history in terms of observable phenomena and values tied to material on some level. As a result, labor takes a unique place in economics, but owners do not. Since owners have material, which is central to Marx’s philosophy, the tension between labor and ownership, and more generally, class struggle, is a natural lens through which history should be viewed. In this vein, epochs of history can be framed in terms of the means of production and the relationships between labor and ownership.
The labor, the workers, is the players, clearly. The means of production is fuzzier, however. In this case, the NBA produces many things, so the means of production is varied and over-determined. Clearly the players produce the wins, but the production of the entertainment is a little more subtle, as the team itself provides much of the thrill and connection to the game for many years.
As the players are marketed more and more heavily by the NBA, however, they have become more and more crucial to the production . . . in both the manufacturing sense and the dramatic sense. Eventually, the media seeks them out, bypassing the team and their communications department. Now, players control their own marketing firms and broadcast their own information in a variety of ways.
The top players are doing this to the greatest effect.
As noted before, they are also not only creating their own news and narrative, they are creating their own teams. They have taken over, to an extent, the main power owners have, leaving them only with whatever losses or gains appear on their balance sheets.
Make no mistake about it . . . this is a revolution.
If left unchecked, Marx’s theory says the struggle between labor and ownership, once to the capitalist phase, will eventually end in the favor of labor. The owners will be relegated to a subservient role to the top players, doing their bidding, catering to their needs, placing their well-being before their own, bending over backwards to accommodate their whims at the expense of their time, money, and energy.
After a while, the other players will grow tired of the special treatment and seize their share of the power. This will start by limiting the pay and influence of the top players through the use of numbers, such as in the union. Eventually, the pay disparity will shrink and the shining talent of the few will carry the many.
Make no mistake about it . . . this is a revolution.
And the owners have noticed. I think.
Amid the owners’ cries for financial and competitive reform . . . reform of the distribution system of money and wins . . . are means to restrict and control the players constructing their own teams. Other aspects of the recent system are not being addressed, at least their addressing is not being reported. Thus, the revolution will continue to happen.
Make no mistake about it . . . this is a revolution.